Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT 44174 Public Disclosure Authorized Trade Western Balkan Integration and the EU An Agenda for Trade and Growth Public Disclosure Authorized Sanjay Kathuria, Editor Public Disclosure Authorized Western Balkan Integration and the EU Western Balkan Integration and the EU An Agenda for Trade and Growth Sanjay Kathuria, Editor © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 11 10 09 08 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-7472-6 eISBN: 978-0-8213-7473-3 DOI: 10.1596/978-0-8213-7472-6 Cover design: Quantum Think. Library of Congress Cataloging-in-Publication Data has been requested. Contents Foreword xi Acknowledgments xiii Executive Summary xv Abbreviations xxiii Chapter 1 Motivation and Macroeconomic Context1 Motivation for the Study1 The Implicit Theoretical Framework 6 A Preliminary Analysis of Current Account Imbalances in Southeast Europe 10 Chapter 2 Trade Trends and Patterns and Labor Competitiveness 25 Introduction 25 Trends and Direction of Trade in SEE countries 27 Composition of Trade 39 Global Production Sharing Networks and FDI 42 Labor Costs and Competitiveness 48 v vi Contents Chapter 3 Deepening Integration 65 Introduction 65 Accession to the WTO and MFN Tariffs 66 The European Dimension 67 Deepening Integration at the Regional Level 69 Chapter 4 Services as an Engine of Growth: The Regional Dimension of Trade in Services 87 Introduction 87 Trade in Specific Services Sectors 90 Conclusions 111 Chapter 5 Attracting Private Investment 117 Introduction 117 Business Perceptions 119 Case Studies 124 Key Bottlenecks: Human Development, Quality of Telecommunications, and Power Availability 126 The Regional Institutional Dimension 136 Conclusions 139 Annex 143 Bibliography 167 Index 173 Boxes 1.1 Exchange Rates in the Western Balkans 11 2.1 Network Trade Helps, but Is Not the only Source of Skills and Technology 45 2.2 Eastern Europe Hit by Shortage of Workers 49 3.1 Regulatory Convergence and Acquis Compliance 68 3.2 CEFTA and Other Regional Agreements in SEE 70 3.3 Intraregional FDI Flows in the Western Balkans 77 3.4 The Privatization of Zenica Steel Mill and its Impact on Regional Supply Chains 77 4.1 Private Sector Airlines: Grupo Taca (Central America) and Sky Europe (Slovak Republic) 95 4.2 Significant Investments Have Occurred in the Telecom Sector in the Western Balkans 99 Contents vii 4.3 National Sovereignty and Cross-Border Institutions 102 4.4 The Knock-on Effects of Erste Bank’s Entry into the Serbian Market 107 4.5 Temporary Worker Agreements: Win-Win 110 5.1 Higher Quality Helped This Romanian Firm to Expand Clothing Output 125 5.2 Privatization and EU Prospects Have Seen Contrasting Fortunes of Leskovac (Serbia) and Stip (FYR Macedonia) 127 5.3 Availability and Cost of Labor is Manifesting Itself Differently in Different Countries 128 Figures 1.1 SEE: Change in Current Account Deficits and Change in Investment Rates 16 2.1 Export Coverage of Imports and Share of Exports in Total Trade, Bulgaria, Croatia, and Romania (BCR) and SEE5, 1996–2005 28 2.2 Share of Exports Destined for EU27 in 2005 35 2.3 FDI and Exports in SEE, 2005 48 3.1 Logistics Perception Index and GDP Per Capita (PPP) 76 4.1 Mobile and Fixed-line Penetration Rates in SEE 98 5.1 SEE Countries: Key Gaps in Perceptions of Business Constraints Compared with the Slovak Republic, 2005 120 5.2 SEE Countries: Key Changes in Perceptions of Business Constraints Compared with the Slovak Republic, 2005 121 5.3 Private Sector Share in GDP (%) vs. Skills and Education Constraint, 2005 129 5.4 Average Rank on Mean Achievement in Six Tests vs. GDP per Capita, 2003 and Gross Secondary Enrollment Ratios 131 5.5 Logistics Perceptions Index 2006: Overall Rank vs. Infrastructure Rank 132 5.6 High Payoffs to Telecom Quality Improvement 134 5.7 Cost of a Ten-minute Call from the United Kingdom 134 5.8 Electricity Consumption Per Capita (Coefficient of Variation, 1994–2004) vs. Electricity Production Per Capita, 1994–2004 Average 136 viii Contents Tables 1.1 Key Economic and Social Indicators, SEE and Slovakia2 1.2 Key Indicators, Montenegro and UNMIK/Kosovo9 1.3 Current Account Balances 13 1.4 SEE: Exports of Goods and Services 14 1.5 Net Inflows of Foreign Direct Investment 15 1.6 Gross External Debt 16 1.7 Gross National Savings 17 1.8 Public Savings 17 1.9 Private Savings 18 1.10 Gross Domestic Investment 20 2.1 Growth of Goods and Services Trade in SEE 28 2.2 Developments in Trade in Goods and Services in SEE Countries, 1996–2005 30 2.3 Exports and Total Trade in Goods and Services as Percent Share of GDP-PPP (Openness) by SEE Country, 1996–2005 31 2.4 Comparisons of Applied Tariff Rate (Simple Average in %) on SEE Imports by Product Type 33 2.5 Intraregional Merchandise Exports and Imports by SEE7 Country, 1996–2005 36 2.6 The Structure of SEE Exports by Major Product Category, 1996 and 2005 40 2.7 Trade in Parts and Components by SEE Country and Other Selected Comparators, 1996–2005 43 2.8 Stock of Foreign Direct Investment (FDI) by SEE Country and Other Selected Comparators, 1995–2005 47 2.9 Trends in EU27 Market Shares of Apparel and Clothing by SEE and Other Selected Countries, 1996–2005 50 2.10 Gross Labor Costs 52 2.11 Alternative Sources for Gross Wages in Industry 54 2.12 Ratios of Cost of Labor Relative to Albania, 2005 54 2.13 Index of World Bank Wages 55 2.14 “Returns” to Skills 57 2.15 Wages and Capital- and Skilled-Labor Intensity of Exports 58 2.16 Employment Protection Legislation, 2007 59 3.1 Doing Business Data for Trading across Borders 74 3.2 Clearance Times for Import Shipment 75 3.3 P&C Trade to Total Manufactured Exports 76 Contents ix 4.1 EBRD Reform Indicators and Selected Infrastructure Performance Data 92 5.1 Share of Firms Reporting Constraints in Infrastructure, Human Development, and Land Markets 130 5.2 Telecom Indicators in SEE and Comparators 135 5.3 Investment Reform Index (IRI) Scores for Education and Training of Workforce 138 Foreword The Western Balkans region is a key part of Eastern Europe. It comprises a group of diverse countries at different stages of accession to the European Union (EU)—the Former Yugoslav Republic of Macedonia and Croatia are candidate countries (with Croatia having started negotiations); Albania and Montenegro have signed Stabilization and Association Agreements (SAAs), an important step in the accession process; and Serbia, along with Bosnia and Herzegovina, has initialed a draft SAA with the European Commission. The SAA process is also expected to be open to Kosovo, once its status issues are fully resolved. An increasing part of the World Bank’s activities are at a region-wide level. As such, this book is part of the institution’s efforts to understand the Western Balkans better, and to put forward ideas that could merit further exploration at both the regional and country levels. It will feed into ongoing activity within the Bank at the country level and into the dialogue with development partners, especially the European Commission and others actively engaged in the Western Balkans. Instead of focusing on current constraints to development, the book draws attention to possible constraints to faster and higher levels of pri- vate-sector-led growth in the future. It does this, among other ways, by using the Slovak Republic as a comparator, and by analyzing possible xi xii Foreword binding constraints if growth were to accelerate and be led by the pri- vate sector to a much greater extent than is currently the case. The findings merit close attention. Given the small size of the countries involved, the book focuses on the critical importance of exports for growth, and in turn on the importance of foreign direct investment (FDI) for exports. It uncovers export patterns that, for most countries in the Western Balkans, could constrain sustained export growth and identifies priority areas that may call for more attention from policy makers.